HAMP And The Negative Amortization Loan

by Susie
(Glen Ellyn, Illinois, USA)

Ask Kate about Hamp and the negative amortization loan: Hi Kate. I do qualify for a HAMP loan which would ultimately reduce my current mortgage payment by half. Does this create negative amortization on my loan?

Susie continues... Does the mortgage debt continue to increase because I am only paying the reduced amount against my loan? Yes it may buy me time, but bottom line do I end up further in debt?

Kate Answers: HAMP And The Negative Amortization Loan

Dear Susie, What a great question.

A negative amortization loan can be a real enemy to the homeowner's equity.

Typically, the negatively amortizing loan offers minimum house payments, not enough to pay the interest being charged that month.

So the minimum payment is seldom sufficient to reduce the mortgage balance. In fact, it can increase the mortgage balance. As we've seen during times of decreasing real estate values, this can become a formula for foreclosure. So I understand your concern.

Now of course you will have to read your official loan documents to be sure, but your HAMP loan should not have negative amortization.

However... you may owe a lump sum when you refinance or sell your house. (Sigh, sorry to have to give you a however.)

How HAMP Creates Affordable Monthly House Payments

Here is how HAMP can help struggling homeowners. Based on the underwriting process, the homeowner is assigned a low interest rate and affordable mortgage payments based on a reduced loan amount.

The difference between the reduced loan amount and the balance currently owed receives a forbearance. This means it is set aside to be paid back as a lump sum when you refinance or eventually sell the house.

For example, let's say you owe $200,000 on your mortgage but HAMP bases your monthly payments on a reduced loan balance of $140,000. The remaining $60,000 receives a forbearance, to be paid back when the house is sold or refinanced.

Generally speaking, there should be no monthly payments on the amount receiving the forbearance. Plus no accruing interest. Therefore, your mortgage balance would not increase. So it does not fit the definition of a negative amortization loan.

Watch for your HAMP loan documents which you should receive after your trial period of 3 house payments. Read them carefully and enlist a trusted adviser for help understanding the fine print, if necessary.

Guidelines for Initial HAMP Eligibility

Here are the minimum guidelines to determine initial eligibility under the HAMP program.

1. The home is your primary residence.


2. Your mortgage was obtained before January 2, 2009.


3. Your mortgage balance is under $729,751.


4. You can demonstrate a financial hardship.

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Susie, one more thing. Is this page is helpful to you? I'd like to hear back from you.

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Have You Seen The Most Recent Ask Kate Answers

• Mortgage and Foreclosure Relief For Distressed Homeowners
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• Negotiating a Short Sale after Loan Modification

Best wishes,

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